Thursday, 7 October 2010

Five more government confusions over child benefit

There is more confusion over the government's rushed and ill-thought through approach to cutting back on child benefit. I raised ten policy headaches for the government on Left Foot Forward on Tuesday.

However, the policy is becoming considerably less rather than more clear as the week goes on. There has been no coherent or official account of several important aspects of government policy, with Ministers making both factually wrong and contradictory statements about the effects of the initial change, and plans for future policy.

Even those who support the government's intentions to curtail child benefit to higher earners must find both the policy design and communication shambolic. Here are five issues where the government's statements have introduced more confusion since Monday.

1. Has Osborne drawn up further unannounced plans to cut child benefit further? Has he already made plans to break his (latest) promise to protect child benefit for those earning under £40,000?

Two Cabinet Ministers have told The Telegraph that the Chancellor plans to announce further cuts to child benefit within the next fortnight, despite not having included this in his

Ministers are close to agreeing plans that will see the age at which children receive benefit fall from 18 to 16. The change would save up to £2 billion and is considered "an easy win" for George Osborne, the Chancellor, as he prepares to unveil the comprehensive spending review in two weeks' time.

A senior Cabinet minister said: "We have not finished yet. We are still looking at lowering the age.

"It would be another sizeable chunk of money saved."

Another Cabinet minister confirmed: "We haven't announced it – yet."

It would be extremely bizarre to announce different sets of cuts to child benefit separately in the same month, adding to this week's chaotic impression of policymaking on the hoof.

Osborne told the BBC breakfast programme on Monday that his proposed child benefit changes "would not target in any way" basic rate taxpayers in receipt of child benefit. However, the further change envisaged would overturn this pledge too, since only basic rate taxpayers with children would be affected, since higher rate payers with 16 and 17 year olds are already going to lose all of their child benefit to the cuts announced so far. If it proceeds, will the government show that it has studied the impact which the abolition of child benefit for 16 and 17 year olds - with Educational Maintenance Allowances vulnerable too - on the staying on rate of disadvantaged students? This should particularly concern Nick Clegg, who has said that social mobility is his number one priority in government.

2. Does the government plan to means test child benefit after all?

David Cameron told the Today programme on Tuesday morning that child benefit would not be incorporated into the government's new universal credit benefits system: ""If you got rid of child benefit altogether and rolled it into the universal benefit, you would have a means testing system for every single family in the country". In my Left Foot Forward blog, I noted that "the direction of Tory policy thinking suggests this could well change in the future".

I have no idea whether the Prime Minister or the Work and Pensions Secretary are right about the government's plans. If the government does not yet have a policy, it may be a good idea to stop publicly briefing two contradictory approaches in the meantime.

3. At what earnings level will people lose child benefit? How far below the £44,000 figure used by Ministers on Monday will the real cut off point fall?

The £44,000 figure - introduced by George Osborne in the BBC interview in which he first revealed the plan and then followed up by every media outlet - is clearly misleading, as Channel 4's FactCheck blog sets out.

The child benefit changes are scheduled for 2013. But the Coalition's policy is to reduce the higher rate threshold across this Parlament, as part of its package to increase the income tax starting point. The £43,875 threshold will already be £42,375 by Autumn 2011. The government has no plans to return it to £44,000 by 2013.Having said it is committed to increasing the lower threshold towards £10,000, the logic of its own policy would bring the higher rate threshold under £40,000 by the end of the Parliament. The Treasury describe any reduction to as "completely hypothetical", though further threshold changes are the government's oft-stated policy. The accountants Grant Thornton project a higher tax rate starting point of £38,600 during the Parliament.

(The government wants only lower rate payers to benefit from a higher starting threshold, with a neutral effect on higher rate earners. The child benefit change now complicates this issue considerably: the policy intention was that those at the top end of earnings distribution while within the basic rate would also gain from the tax threshold change, despite just crossing over into the higher rate threshold at the same time; they will now lose out considerably from the change if they have dependent children).

This policy of lowering the higher rate threshold is now likely to become an important point of backbench pressure, because of the new child benefit policy. The current policy approach also means that the extraordinarily high marginal tax rates (100-500%+) for earners with families will fall lower down the income scale than £44,000. This is the biggest flaw in the government's crude policy design

This was Chancellor Osborne's BBC breakfast interview, which led to the £44,000 figure being the central focus of every media report about the policy.

"We are going to withdraw child benefit from higher rate taxpayers ... These are going to be families where there is a higher rate taxpayers: thats around 15% or so of families ... I don't want to introduce a complex means-test. I want child benefit to be the benefit that people experience it: easy to apply for. This measure does not target in any way the people - millions of people - who are paying the standard rate of tax and are receiving child benefit.

Q: So everybody earning more than £37,000 will lose their child benefit by 2013

Osborne: Its more like £44,000.

Q: £44,000. Thank you. How much will that give you?

Osborne: That will save about a billion pounds.

Channel Four reports that the government does not know how many higher rate taxpayers receive child benefit, which makes it difficult to work out how it has calculated its estimates of 1.2 million losers. This again strengthens the impression of policy-making on the hoof.

Which begs the question how many people will actually lose out because of this cut? Well, this has added to the confusion. In its original briefing notes, the government said that 1.2 million households currently have at least one earner paying higher rate tax and also receive child benefit. But today they said they got this wrong and the 1.2 million figure is the number of people they expect to be affected by 2013. The HMRC confessed to CutsCheck that it also doesn’t have figures on the number of higher rate tax paying householders who currently also receive child benefit. If anyone does have this information, CutsCheck would love to hear from you.

4. Where does this week's chaos leave the marriage tax policy?

The Prime Minister has now promised that the marriage tax break will come in during this Parliament - after suggestions it would be quietly ditched. He has signalled that he does not want to confine this to basic rate payers, so that the same "stay at home" mums affected by child benefit lose out again.

This is both ineffective and bizarre: it would defeat the point of the child benefit cost savings by swallowing up all of the savings. Cameron's tax reform will benefit millions of childless couples while leaving out as many as four out of five families with children. It will not "recognise" two-thirds of marriages either.

It will also create Conservative-LibDem tensions. The junior Coalition partner wrote the right to abstain into the Coalition agreement, having been scathing about the policy in opposition. David Cameron implicitly attacked Nick Clegg over this policy in his conference speech: "Nick and I didn't agree about everything. He wanted clearer pledges on PR. I wanted them on the family". Clegg should therefore be pressed by LibDems to articulate the evidence that the policy is an incredibly ineffective way to help families.

5. How will women's pensions rights be protected?

Women gain NI contribution credits towards the state pension if in receipt of child benefit for children under twelve. The Treasury press office have now told the Daily Mail that nobody will lose out ...

However, after being alerted to the anomaly by Money Mail, the department for Work and Pensions, and the Treasury reassured mums that no one would lose out“.

... but there has been no official ministerial acknowledgement to confirm this, nor any indication about how this will be done.

The government as said its approach will be to ask higher rate taxpayers not to claim child benefit, but to tax it back from those who do. One approach would be for women who need NI contribution credits will be asked to still claim and have it taxed back from their partners. It is good that the government will do the right thing, having been alerted to the issue. One danger here will be in how the government can communicate effectively what those affected need to do, so that they do not inadvertently damage their state pension rights, if for example George Osborne continues to say that he will want higher earners to stop claiming.